Fair-Value Fight Packs a Punch

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The push-back against fair-value accounting that began with grumblings from banks over large writedowns last year has escalated into a long, dragged-out battle that could muddy the independence of U.S. and international standard-setters from political persuasion.

The battle lines will be drawn anew tomorrow during two roundtables at the Securities and Exchange Commission headquarters. In attendance: bankers, accountants, rule-makers, and investors. While investors may love fair value for giving them transparent, up-to-date information about the worth of their companies’ assets, some of the financial professionals behind those numbers are unhappy with the practicality and volatility problems they say the rules have created.

Observers of the meeting should expect to hear about the usefulness of FAS 157, the Financial Accounting Standards Board’s fair-value measurement standard, as well as its faults. Much of the debate will likely focus on the uncertainty surrounding valuations that are based on thinly traded or nonexistent markets.

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In recent months, financial institutions have been pressuring the SEC to revamp fair-value accounting rules, saying they led to failures and the crippled credit market. In response, the SEC and FASB have issued guidance in recent weeks that didn’t change existing rules but was meant to clear up any confusion for valuing financial instruments in illiquid markets.

Similarly, the International Accounting Standards Board recently responded to political pressure but actually changed one of its rules to make it more like U.S. GAAP. International companies can now reclassify their financial assets held in trading accounts as “held for maturity,” which means they will no longer have to be marked to market.

FASB’s most recent amendment to its flagship fair-value rule was issued in rapid order relative its other standard-setting activities. In less than two weeks’ time and after collecting more than 100 comment letters, the board proposed and accepted its example of how a company should value a financial instrument in an inactive market. Its oversight board, the Financial Accounting Foundation, says the expedited turnaround by FASB was done during an emergency.

However, the American Bankers Association believes FASB’s guidance didn’t come quickly enough or do enough to clear up how banks should apply fair value when the financial markets are a mess. “We believe it is necessary for the SEC to use its statutory authority to step in and override the guidance issued by FASB,” wrote ABA president Edward Yingling in a letter to SEC chairman Christopher Cox earlier this month. The group will be represented on Wednesday’s roundtable by Randy Ferrell, CEO of Fauquier Bankshares and a member of ABA’s Community Bankers Council.

The bank lobbying group’s most recent suggestion to Cox could breach the independence wall that sits between FASB and the SEC, which in 2003 vowed that accounting rules should be free from bias. In a letter dated October 27 and addressed to Cox, FAF president Robert Denham wrote, “it would be detrimental to investor confidence to overturn a FASB standard or otherwise suspend or restrict the independent standard-setting activities of the FASB in the current economic environment and in response to political pressure from some financial industry groups.”

The SEC does have the right to suspend accounting rules. Congress reminded everyone of that fact in the recently passed Emergency Economic Stabilization Act, which said the SEC may put a moratorium on mark-to-market accounting if the regulator deems such a move “necessary or appropriate in the public interest.”

The new law also requires the SEC to review by January the role mark-to-market accounting played in the recent round of bank failures. Wednesday’s roundtables are part of that effort. During the first panel, Damon Silvers, associate general counsel for the AFL-CIO, will likely repeat his distaste for allowing companies to mark their assets to a management-made model when they have no other prices to value their financial instruments against. He will be accompanied by University of Chicago accounting professor Ray Ball; PricewaterhouseCoopers partner Vincent Colman; former FDIC chairman William Isaacs; BancorpSouth CEO Aubrey Patterson, and others.

The second panel includes Patrick Finnegan, a director at the CFA Institute, a staunch supporter of fair-value accounting, and Cindy Ma, a managing director at investment bank Houlihan Lokey Howard & Zukin, who has said a suspension of FAS 157 could break investors’ already-wavering confidence. Also expected to attend are Richard Ramsden, who leads an investment research group at Goldman Sachs; Russell Wieman, a Grant Thornton partner; and Chuck Maimbourg, a senior vice president at Key Bank and a former CFO of Zaxis International and Trion Technologies.

Representatives from FASB, IASB, the Federal Reserve, Treasury, and the Public Company Accounting Oversight Board will also attend as “observers.”